Neglecting Governance: Silicon Valley Bank's journey from prosperity to peril

On March 7th, Silicon Valley Bank boasted on Twitter about its ranking on the prestigious Forbes list of America's best banks. Yet, a mere three days later, on March 10th, the bank's stocks took a nosedive. It plunged 60%, leading to the US government takeover. What mysterious forces brought about this perplexing twist of fate? The Silicon Valley Bank Collapse?

Let's get in and explore the World of Banks. 

Banks have a standard modus operandi: they take deposits from customers and offer them a prime rate of interest in return. But did you know that when banks collect deposits, they pool a portion of those funds and invest them in bonds? 

While not particularly profitable, banks can quickly sell bonds in times of crisis. This provides instant liquidity. That's the idea, at least. But the truth is far more intricate. A few ill-advised banking choices can lead to utter financial ruin.

Following the pandemic, the Federal Reserve raised rates to curb inflation post-pandemic, causing bond prices to drop. This storm caused market volatility. Startups couldn't raise funds from VCs, so they withdrew their deposits, forcing the bank to sell its investments at a loss due to falling bond prices.

From 2020 to 2022, Silicon Valley Bank experienced a threefold increase in deposits, reaching $190 billion while loans only doubled. With an abundance of spare cash, Silicon Valley Bank decided to invest in it. Silicon Valley Bank invested nearly $80 billion in high-yield assets to boost profits. 

Unfortunately, most of their investments were in long-term bonds. Therefore, highly sensitive to fluctuations in interest rates leading to Silicon Valley Bank Collapse. They suffered losses due to bad investments and had to raise capital to comply with banking regulations.  Eventually, the bank was taken over by regulators. 

Banking decisions impact the economy and can lead to crises. When a bank faces problems, it becomes public news and causes depositors to panic. That's a reason why people rush to withdraw their funds, lose trust, and lead banks to potential collapse.  

This begs the question: Could risk management and governance have prevented this? Or did their business continuity plan fail?

The collapse of the FTX Exchange cryptocurrency and crypto hedge fund had a major impact on two other banks. This unexpected blow-up was caused by weak governance and a risky investment portfolio.

On March 8, 2023, a report confirmed that governance was the key driver of this downgrade. While risk management failures played a role in these collapses, proper risk governance could have prevented the devastating impact. The collapse may trigger an impact of over 10,000 startups and subsequent layoffs.

Silicon Valley Bank Collapse highlights the need for effective risk governance in the banking sector. Despite regulations, banks still fail due to weak risk management practices. 

The integration of technology tools, increased regulatory rigor, and improved prudential norms have led to better systemic controls of risk management, but the operational risk remains a challenge, as it is difficult to assess and control. However, automation of risk governance could be a potential solution, with reports and data available at the touch of a button.

As the banking sector continues to be impacted by regulatory change, both locally and globally, it's clear that the future will bring more regulation, especially for banks operating in emerging markets. To navigate this changing landscape, automation can be a valuable tool for banks looking to streamline their compliance and risk management processes. 

Implementing Automated solutions

• Complete Risk Governance
• Regulatory Governance
• Risk Assessment 

Ascent Business Technology Inc offers comprehensive Risk governance solutions for banks, covering everything from Operational Resilience Management to Financial Risk & Compliance Management along with Corporate Banking Escrow Management. 

Maximize your bank's risk management potential with Ascent. Discover our comprehensive solutions at https://www.ascentbusiness.com/ and transform your risk governance today.